Restrictive Covenants - Detailed Analysis

Last Updated: October 2022

1. Has there Been a Breach?

Assuming the covenant is enforceable, occasionally the dispute before the court includes a question as to whether there has been a breach, i.e. impermissible competition, solicitation or disclosure of confidential information.

Such dispute may arise over the wording of the clause in question. In a case concerning a non-competition covenant attached to the sale of a business, the court was called upon to interpret a definition that read: “The ‘Seniors Care Business is defined to be any intermediate care, extended care or long term care facility of any kind.”

The plaintiffs argued the phrase “care” should be interpreted in its broadest sense, whereas the defendants argued, and the court agreed, that the context of the business being sold had to be considered:

In the absence of clear language to the contrary in the agreement, the language employed in the agreement must be understood in the context of the business which was the subject of the transaction and not the broader meaning of “care” in common usage.

Although I have no doubt that the word “care” admits of a myriad of meanings in general conversation, in the context of the particular business which was the subject of the Asset Purchase Agreement, I find that “long term care” must refer to care provided in the five stages of care from personal care through extended care.1

In a Nova Scotia case, the court was called on to assess whether the vendor of a Halifax pharmacy breached a seven-year non-competition  clause by virtue of continuing to have his Dartmouth pharmacy, which he retained, deliver prescription products to residents in the area subject to the covenant. The clause prohibited competition for seven years within “the geographic confines of the Halifax peninsula.” At the time of the sale, the vendor’s Dartmouth pharmacy had customers in the Halifax area to whom it sold pharmaceutical products via its prescription delivery service and it continued to sell products to these customers after the sale of the Halifax pharmacy.

Reviewing the factual matrix that led to the covenant, the lower court found that the purchaser knew, or ought to have known, that the Dartmouth pharmacy could have prescription-delivery customers in the Halifax peninsula and if he intended to prevent the vendor from continuing to sell products to them, he should have negotiated language to that effect. The court found the covenant had not been breached, also noting that the vendor had not actively solicited Halifax peninsula clients and that requiring the vendor to drop such clients would be impractical. 2

The Nova Scotia Court of Appeal overturned the decision, however, finding that the trial judge had failed to take into account many of the surrounding circumstances of the transaction.  The restrictive covenant was a critical component of the purchase and sale of the pharmacy.

The Court of Appeal held that the contract should be interpreted “so as to accord with sound commercial principles and good business sense, and avoid commercial absurdity.”3 It continued:

…The judge’s determination that a business could escape the confines of a restrictive covenant simply because it is pre-existing is directly contrary to those principles and good business sense. It would mean that:

(a) A purchaser is deemed to know of the existence of the vendor’s other business interests, although it is only the vendor who can know of them and their extent;

(b) A broadly worded, all-inclusive restrictive covenant would not capture an existing business;

(c) A vendor is free from any obligation to disclose their other business interests and any burden from ensuring that their activities are excluded from the restrictive covenant; and

(d) Had a vendor started a new business contrary to a restrictive covenant, they would be in breach; yet they would be free to compete with their former business if they did so with their existing business.

[49] Restrictive covenants are intended to provide a material benefit to both the owner of a business and to the purchaser of that business. They enable the owner to sell his business by giving the purchaser the assurance of non-competition. They provide the purchaser with protection from competition by a former owner who knew the business and its customers while it establishes itself.

[50] Exempting a pre-existing business from a restrictive covenant makes no business sense.4

The question of a breach may arise in the context of an advertisement placed by a former employee who is subject to a non-solicitation agreement.  The BC Court of Appeal stated, in a case concerning a group of dentists subject to a non-solicitation clause, that “something more than a general information advertisement to the public” was required to constitute a breach and accordingly held that an advertisement in a newspaper announcing the opening of a practice and the placing of a weekly “business card” in the same newspaper for several months did not breach the covenant.5

More closer to the line, perhaps, was an advertisement taken out by an optometrist after leaving her employer, which announced the opening of her new clinic and stated that she “looks forward to seeing familiar faces and welcoming new patients.”  The court found that the invitation to “familiar faces” might include those customers she came to know through contact at her former clinic, but could also include anyone she had become familiar with in her nearly nine years of residence in the city.  The court held it was possible to construe the advertisement as targeted at repeat customers at the former clinic whose faces had become familiar to the defendant, but found “such an interpretation is so unlikely…as to be fanciful.”6

Verbal attempts to notify past clientele as to a departing employee’s new place of business, as opposed to carefully-crafted written communications, run the danger of going over the line.  The courts have been dubious that phone calls of such nature are merely efforts to notify clients of a new location and nothing more. In the case of an investment advisor who moved from one bank to another and then telephoned his clients, the court stated:

In this context it is safe to conclude that Mr. D’Souza wished to retain his clients, and TD wished him to retain his clients.  It is safe to conclude that BMO wished to retain those same clients.  Obviously, of course, someone had to tell the clients that Mr. D’Souza was changing firms.  Obviously, of course, those clients would be free to make their own choice of investment advisor in the future.  In this context, can it be argued seriously that calls placed by Mr. D’Souza prior to and after departure to his clients, telling them of his move, were not solicitations?  This is sophistry, and will just lead to ridiculous litigation demarcating the precise words that may and may not be used by advisors when they approach clients to secure their business.7

The act of simply responding to a public request for proposals, without more does not constitute solicitation.8

In the case of clauses prohibiting the use or disclosure of confidential information or trade secrets, the courts have held that “committing to memory the names of clients, their contacts, the clients’ needs or preferences, and the rates that the clients were willing to pay, is confidential information and exploiting such information to solicit former clients ‘is tantamount to the physical asportation of a client list’ and its use is prohibited.”9

  1. Woodgrove Manor Ltd. v. Kem Enterprises Inc.,  2000 BCSC 718 (CanLII) at paras. 20-21.
  2. Jorna & Craig Inc. v Chiasson, 2018 NSSC 220 (CanLII), at paras. 71-76.
  3. Jorna & Craig Inc. v. Chiasson, 2020 NSCA 42, at para. 48, quoting from Salah v. Timothy’s Coffees of the World Inc., 2010 ONCA 673, at para. 16
  4. Jorna & Craig Inc. v. Chiasson, 2020 NSCA 42, at paras. 48-50.
  5. Dr. P. Andreou Inc. v. McCaig, 2007 BCCA 159 (CanLII), at paras. 22, 35.
  6. IRIS The Visual Group Western Canada Inc. v. Park, 2016 BCSC 2059 (CanLII), at paras. 10, 44-46, aff’d 2017 BCCA 301 (CanLII).
  7. BMO Nesbitt Burns Inc. v. TD Waterhouse Investor Services, 2006 CanLII 17338 (ONSC), at para. 14 (though the statement was made in the context of alleged common law duties, not in the context of a non-solicitation covenant). See also MD Physician Services Inc. v. Wisniewski, 2017 ONSC 2772 (CanLII), at para. 111, which adopted this take on claims that such communications were not solicitations in the context of an enforceable non-solicitation covenant.
  8. IBM Canada Ltd v Almond, 2015 ABQB 336 (CanLII), at para. 79. See also Veolia ES Industrial Services Inc. v. Brulé, 2012 ONCA 173 (CanLII) at para. 44. However, see IT/Net Ottawa Inc. v. Berthiaume, 2002 CanLII 42541 (ONSC), where a defendant’s actions in taking steps to ensure his future employer would be invited to bid on a RFP that was not opened up to the general public was found to be in breach of a non-solicitation clause (the clause was not upheld on other grounds, however.)
  9. 2158124 Ontario Inc. v Pitton, 2017 ONSC 411 (CanLII) and cases cited therein, at para. 43.

(a) Declaratory Relief Prior to a Breach

Occasionally, a party may seek a declaration as to the enforceability of a restrictive covenant to which it is currently subject.  The decision whether to entertain such an application is at the court’s discretion.  In a Nova Scotia decision, the court was prepared to determine the application for declaratory relief where there was an alleged factual foundation for the declaration sought, there had been difficulties in the relationship between the parties for some time, one of the parties had considered termination as a possible resolution to the impasse between them and dealing with the application would resolve the issue of who held the balance of power between them.1

  1. Wm. Tapper Ltd. v. Valero Energy Inc., 2017 CanLII 16210 (NL SCTD), at paras. 58-60.